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weaknesses of wacc as discounting ratewaccoverall cost of capital has the following problems like a discounting rate as it can simply be used as a
marginal cost of financethis is cost of new finances or additional cost a company has to pay to raise and use additional finance is given bytotal
computation of weights or proportionsin computation of the weights or proportions of different capital components the following values might be used
weighted average cost of capital weighted average cost of capital or wacc is also called the overall or composite cost of capital since various
cost of redeemable debentures and preference sharesredeemable fixed return securities have an exact maturity period the cost of those securities
dividend yield or gordons modelthis model is used to determine the cost of various capital components in particular cost of equity - ke cost of
example of capital asset pricing modelkk ltd is an all equity firm whose beta factor is 12 the interest rate on t bills is currently at 85 and the
capital asset pricing model capmcapm is a methods that is used to establish the required rate of return of an investment provided a particular level
example of market modelillustrationfor the past five 5 years the mps and dps for xyz ltd were follows as 1998shs1999shs2000shs2001shs2002shsmps
market model - methods of computing cost of capitalthis model is utilized to establish the percentage cost of ordinary share capital cost of equity
risk adjusted discounting rate - methods of computing cost of capitalthis method is used to establish the discounting rate to be used for a provided
reasons for different interest rateinterest rates may differ in different market and market segment sincei size of the loan deposits above specific
importance of interest ratesthese are of a specifically relevance to a finance manager sincei they measure the cost of borrowingii interest rates in
interest rate levels and stock pricesinterest rates contain two effects on corporate profitsa since interest rate is a cost and like the higher the
determinants of required rate of return1risk free rate - this is the interest rate such would exist on default free securities like treasury bills
foreign trade balanceif the government buys or imports much more than it sells or exports there will be a trade deficit such will require
government budget deficitif the government spends much more than it gets in from tax revenue it runs a budget deficit this deficit should be covered
cbk - monetary policythe money supply in the economy has a main effect on both the rate of inflation and the level of economic activity the level of
tests of term structure of interest rates theoriesvarious tests have been conducted mainly in usa and they show that all the three 3 theories have
market segmentation theorythis theory states as the main investors lenders and borrowers are confined to a particular segment of the market and will
important factors for expectation theorythe following circumstances are essential for the expectation theory to holdi ideal capital markets exists
expectation theorythe theory states here that the yield curve depends on the expectation concerning with future inflation rates the rate on long-term
liquidity preference theorythis theory states that short term bonds are extremely favorable than long term bonds for two 2 purposes1 investors
term structure of interest ratesthe term structure of interest rate give details the relationship between the term to maturity and interest rates and
factors that influence the cost of finance1 terms of reference - if short term the cost is generally low and vice versa2 economic conditions